By Eric Schultz, Founder & Managing Member, Reliant Fund Services
Do you want a quarterback, or do you want to be the quarterback?
Most emerging managers build their back office by selecting providers one at a time. A fund administrator, an auditor, a tax preparer, maybe an outsourced CFO.
Most firms treat each of these as a separate vendor decision. They spend considerable time evaluating each individual provider, but not how all of those providers will actually work together once the fund is operating.
The biggest question that often goes unanswered is:
Who is accountable when something goes wrong?
This is not a question about vendor selection. It is an operating model question.
After more than 30 years working with private fund managers, I have found that most firms operate under one of three models. Very few choose their model intentionally. This article explains what each one looks like and how to think about which one fits your firm.
What Does It Actually Mean to Structure Your Back Office?
Structuring your back office means deciding not just who handles each task, but how the entire operation runs day to day and who is ultimately accountable for it.
There are really two financial sides to the business being built at the same time.
The Fund is where investor capital lives. It needs accounting, capital calls, distributions, allocations, investor reporting, financial statements, waterfalls, and audit and tax support.
The Firm is the business the partners are building. The management company needs accounting, accounts payable, payroll, cash management, budgeting, forecasting, partner economics, and financial reporting.
Those two sides are connected.
Whatever providers you hire, someone still needs to review the work, handle exceptions, coordinate across providers, connect the fund and management company activity, respond to auditors and tax advisors, and stand behind the final numbers.
That is where another question becomes much more important:
Who owns the gaps?
Who reviews the work? Who handles the exception? Who follows up when two providers think the other one owns something? Who stands behind the final numbers?
If that responsibility has not been assigned intentionally, it defaults to the GP.
The big question becomes:
Do you want a quarterback, or do you want to be the quarterback?
Part of the answer comes down to what is available.
There are plenty of fund administrators. There are not many that can administer the fund, handle the management company, and provide real Controller and CFO support under one operating model. Even fewer can do all three well.
Most managers therefore end up building from separate providers, whether by design or by default.
The Three Back Office Operating Models Emerging Managers Can Choose From
Model 1: The Fragmented Model
The Fragmented Model is a common starting point for emerging managers.
The fund administrator handles the fund. The management company is handled internally, often by a GP or someone on the operating team. The auditor handles the audit. The tax firm handles the tax returns. Each provider owns its piece.
The challenge is that the spaces between those responsibilities often do not have a clear owner.
Who notices when something from the administrator does not look right? Who determines whether an issue belongs with the administrator, auditor, tax preparer, or attorney? Who connects what is happening at the fund with what is happening at the management company? Who keeps following up until an issue is actually resolved?
In a Fragmented Model, those responsibilities often default to the GP.
The appeal is understandable. It can appear to be the lowest-cost option because you are buying individual services only as you need them.
But the invoices do not necessarily show the entire cost.
GP time spent coordinating providers, chasing information, reviewing work, and resolving issues is still a cost. So is hiring someone internally earlier than you otherwise would because the existing structure requires someone to manage it.
The Fragmented Model can work. The important thing is recognizing who will own the gaps between providers before those gaps become the GP’s job.
Model 2: The Coordinated Model
The Coordinated Model keeps the separate providers but adds a financial quarterback.
Typically, that is a Controller or CFO who sits between the GP and the rest of the back office.
The fund administrator continues administering the fund. The auditor and tax preparer continue doing their work. But now someone with financial expertise oversees the entire process.
That person reviews the administrator’s work, oversees the management company accounting, coordinates across providers during audit and tax season, handles exceptions, and makes sure issues get across the finish line.
The biggest change is not necessarily who performs the underlying work.
It is who owns the outcome.
That person can be in-house or outsourced. The right answer depends on workload, complexity, budget, and how much senior finance capacity the firm actually needs.
For a manager that does not yet need a full-time senior finance professional, outsourcing can provide experienced oversight while keeping more of the cost structure flexible. As the firm grows, bringing some or all of that capability in-house may make sense.
The tradeoff is that the underlying providers remain separate. The quarterback can coordinate them, but the handoffs still exist.
Model 3: The Unified Model
The Unified Model brings fund administration, management company accounting, and Controller and CFO support together under one operating framework.
The goal is not to eliminate every outside provider.
Your auditor should still audit. Your tax advisor should still provide tax expertise. Your attorneys should still provide legal advice.
The difference is that one team owns the financial back office and coordinates the pieces around it.
The people handling the fund understand what is happening at the management company. The Controller or CFO perspective is integrated into the operation rather than layered on afterward. There are fewer handoffs. And when something unusual happens, there is a clearly identified team responsible for getting it resolved.
For an emerging manager, that can provide financial infrastructure that might otherwise require building a much larger internal team.
But the Unified Model also puts more importance on choosing the right provider.
It is relatively easy to put fund administration, management company accounting, and CFO services on a capabilities list.
Finding one provider that can do all three well is much harder.
The administrator needs strong fund accounting. The management company team needs to understand how an investment firm’s business actually operates. The Controller and CFO professionals need enough experience to provide real oversight and judgment. And all three need to operate as one team rather than three separate service groups sitting inside the same company.
That is the difference between offering a Unified Model and actually delivering one.
What About Separation of Duties?
One of the first questions that can come up with the Unified Model is separation of duties.
It is an important question.
But separation of duties does not necessarily require separate firms. What matters is how preparation, review, approvals, system access, and oversight are structured.
A well-designed Unified Model should still have clear segregation between preparation and review, appropriate approval authority, documented controls, and independent oversight where required.
Using multiple providers introduces a different type of risk: handoff risk.
Information has to move between organizations. Responsibilities can become unclear. One provider may assume another provider is handling something. Issues can sit between firms while everyone believes someone else owns them.
More providers do not automatically mean more control. Sometimes they just create more handoffs.
The objective should not be to maximize or minimize the number of providers.
It should be clear accountability without sacrificing appropriate controls.
Design Your Back Office Before You Choose Your Providers
There is not one model that is right for every emerging manager. The right structure depends on your team, complexity, budget, and how much of the financial operation you want to manage internally.
But the economics matter.
A Fragmented Model may have lower external fees but consume more GP time. A Coordinated Model adds the cost of a Controller or CFO. A Unified Model may have a higher external fee while reducing the need to build certain capabilities inside the management company.
And an internal hire costs more than salary. There are benefits, bonus, recruiting, training, technology, management time, and a recurring fixed cost regardless of where you are in the fundraising cycle.
That is why I recommend modeling your management company budget several years forward.
Do not just ask, “what does this cost today?”
Ask, “what will this operating model cost us three to five years from now?”
Then answer the bigger question:
Who owns your back office?
Not who calculates the NAV or prepares the tax return. Who is accountable for making sure the whole financial operation works?
There is no universally correct model. But there should be an intentional one.
Answer the ownership question first. Then choose the providers.